Even if your tax situation is fairly mundane and you have your taxes withheld at source, there are some events in your life that can generate taxes. Understanding the tax implications of these events ahead of time can help you plan your finances better, and can, in some cases, save you from paying taxes altogether.

See: Personal Income Tax Guide

Cashing out an Old 401(k)
If you have money sitting in a 401(k) plan from an old employer, you may be tempted to cash it out so you don't have to deal with it any longer. In fact, if the amount is less than $5,000 and you have provided no other instruction to the employer, they may cash it out for you. However, once funds leave the protection of a traditional 401(k), they become taxable and you may also owe a penalty on early withdrawal if you are less than 59.5 years old. To avoid this, have old 401(k) plans rolled directly into your new employer's plan or into an individual retirement account (IRA). There are no tax consequences of a direct rollover. If you have already cashed it out, you can avoid both tax and penalties if you re-deposit it to a new plan within 60 days. Of the withdrawal, 20% will be withheld for the IRS, so you will have to find those funds elsewhere to deposit the whole amount to the new plan. (To learn more, check out 6 Problems With 401k Plans.)

Selling Your House
If you have a significant capital gain on the sale of your main residence, you may be on the hook for taxes. The IRS allows you to exclude the first $250,000 ($500,000 for couples who own the house together and file jointly) of the gain from your taxable income, but in most cases, anything over that is taxable. If you have been depreciating part of your house for business or rental purposes, you may also owe back tax on the depreciated amount. To minimize the tax implications, work through the calculation of the gain with a tax professional to make sure that you are including all of your capital improvements and additions over the years, which forms part of your cost base.

Rebalancing Your Investment Portfolio
Many new investors are unaware of the tax implications of buying and selling in their portfolios. In non-retirement portfolios, you are required to calculate capital gains and losses on the sale of any securities, even if you reinvest the proceeds within the portfolio. Starting in 2011, brokers are required to report capital gains to the IRS to ensure that they are reported fully and accurately. The timing of gains and losses can impact the overall tax liability for the year, so ensure that you plan your sales strategically. (For related reading, see Selling Losing Securities For A Tax Advantage.)

Selling Your Collectibles
Most household items you buy for personal use decrease in value quickly, so that, when you sell them at a yard sale, for example, you have a loss. This loss is not claimable for tax purposes. However, some items, such as collectibles and artwork, appreciate in value over time. You are required to report the gain of the sale of these types of items, wherever you sell them. For example, if you have collected baseball cards since you were young and sell the entire collection for $5,000, you have a capital gain of $5,000 minus what you paid for the cards originally and any expenses you have incurred in managing, appraising or selling the collection.

The Bottom Line
There are many life events that can trigger tax consequences, and proper tax planning can save you a substantial amount of money. A tax accountant or lawyer can help manage the tax effects of major transactions. (For more information, read 7 Year-End Tax Planning Strategies.)

Related Articles
  1. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  2. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  3. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  4. Taxes

    Taxes: H&R Block Vs. TurboTax Vs. Jackson Hewitt

    There are more and more tax services to help ease the pain of filing income taxes. Here's our take on three of the biggest.
  5. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  6. Your Clients

    Tips for Making Your Nest Egg Last Longer

    If you’re trying to figure out how to make your hard-earned nest egg last, there’s one piece of advice that stands above the rest.
  7. Personal Wealth & Private Banking

    What People Hate About Financial Advisors

    Advisors need to make a living too, but doing so by cutting corners at a client's expense isn't right. Here are the top complaints against advisors.
  8. Products and Investments

    SRI Funds and Your 401(k): What You Need to Know

    Socially responsible, green and impact investing options are now DoL-approved for 401(k) plans. Here's what investors should know.
  9. Taxes

    Confused About Estimated Tax Deadlines for 2016?

    If you run a business or have investment income, pay attention to this year's estimated tax deadlines. Here are the details, and what's new for 2016.
  10. Retirement

    Retirement Plan Tax Prep Checklist

    Here's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
RELATED FAQS
  1. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  2. How do I file taxes for income from foreign sources?

    If you are a U.S. citizen or resident alien, your income (except for amounts exempt under federal law), including that which ... Read Full Answer >>
  3. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  4. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  5. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
  6. Can a 401(k) be taken in bankruptcy?

    The two most common types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Whether you file a Chapter 7 ... Read Full Answer >>
Trading Center